If you’re just joining us or would like a refresher on the Laws of Success, they are:

1. A Definite Chief Aim
2. Self-Confidence
3. Habit of Saving
4. Initiative and Leadership
5. Imagination
6. Enthusiasm
7. Self-Control
8. The Habit of Doing More Than Paid For
9. Pleasing Personality
10. Accurate Thinking
11. Concentration
12. Cooperation
13. Profiting by Failure
14. Tolerance
15. Practising the Golden Rule

In Part 1 of this series we discussed the importance of having A Definite Chief Aim, while in Part 2 we looked at ways of building the necessary level of Self-Confidence to be a trader. In this article I’ll be exploring the Habit of Saving and why it is so important to us as traders. We’ll also discuss some ways of building the Habit of Saving.

One of the first books on personal finance that I ever read was George Clason’s The Richest Man in Babylon, and I think he summed up the whole idea of wealth creation beautifully in a single sentence when he said “I found the road to wealth when I decided that a part of all I earned was mine to keep.” Note that he is not saying that saving money will make you rich, but rather that it was the ‘road to wealth’. Let’s explore this from the point of view of a trader.

Aside from the obvious fact that you need to have saved some money if you want to trade with it, many traders wonder what the habit of saving money has to do with trading success. I see at least three reasons that traders should develop the Habit of Saving.

The first reason why saving is important to traders is discipline. If you have the discipline to save money, then you have what it takes to make it as a trader. You’ll be able to apply discipline as you learn, then you’ll be able to follow your trading routine with discipline as you search for trades, and you’ll also have the discipline to follow your trading plan while your trades are in progress, without succumbing to the emotions of fear (fear of loss, fear of missing out) or greed. 

The second reason is security. Despite what some people say about trading, the markets are not an ATM or cash machine that you can visit 24/7 and withdraw unlimited amounts of cash from. There are times in the market when there is very little volume and very little movement, and making money is difficult. During these times, you can often trade different markets or instruments, and you will almost always be able to find a trending market somewhere, however if you have saved money, you have a cash flow cushion to tide you over until the markets pick up again (which usually doesn’t take too long), and you also have the comfort and security of knowing that you have extra money available should you need it. This is also good for your psychology, which is the third reason traders should develop the Habit of Saving.

Ask any professional trader for the secrets to their success and a large chunk of their answer will revolve around knowledge (how to trade) and psychology (how to stay out of your own way!). Most people come to trading underestimating the importance of trading psychology (I was guilty of that myself), but it does play a key role in our trading success. There are times when you need to make some tough decisions: your trading plan might be tell you to buy, but the news media may be full of articles and videos and reports telling you that now is a terrible time to buy! This is where doubt can creep in, and fear of loss can enter your mind. However, if you have built up a savings buffer, the pressure is somewhat released because you’re not coming from a place of lack or scarcity, which can cause you to let good trading opportunities go because you’re afraid of losing what little you have.

Similarly, there will be times when you are tempted to take a trade when the setup is not quite there, simply because because you haven’t made any money this week from trading. In scenarios like these, it is far easier to make the right decision if you have the security cushion of a savings buffer. This will help you to have patience and to wait for the right trade, rather than having to settle for a substandard trade because you need the money, or worse, forcing a trade that’s not there.

So the Habit of Saving is clearly something that traders should look to implement in order to speed up their road to trading success. On the surface, the idea of saving money makes a lot of sense to everyone, whether they are traders or not. Spend less than you earn, then invest or use the surplus capital to build either assets or a future income stream through dividends, or perhaps trading income, that you can then live off. Pretty simple, right?

However, if it’s such a good idea, why don’t more people do it? There are many reasons, of course, and I understand that different people have different circumstances and different challenges at certain times of their life, however I think Napoleon Hill hits on the head in this lesson when he says “the saving of money is solely a matter of habit”. How do we develop a habit?

One way is through repetition. George Clason recommended setting aside at least one tenth of your income (Napoleon Hill recommends 20% in this lesson) and living off the rest. For those who are living week to week, this can seem like a difficult thing to do, so they may like to start with a smaller number like 8% or 5% or even 1%. Once you develop the habit, you can simply increase the percentage amount over time.

However, many people find that this approach will work for a little while, but eventually, a large expense comes up or they decide to buy a car or go on a holiday, and all of a sudden they have little left to show for it. One way around this is through enforced discipline. In his book the Automatic Millionaire, author David Bach recommends having your savings taken automatically from your paycheque (or from your bank account once your pay is deposited) and then having the money invested somewhere where you can’t easily touch it, or access it with an ATM card.

Another way to protect yourself from these scenarios is to setup a budget, where you put money aside for larger expenses. Let’s say you earn $1,200 every week after tax. You might take 10% of that and put it into a savings account that you call your “wealth fund” or “wealth account”. This is treated like a money tree – you will water it, nurture it, and help it grow, and you will protect it at all costs. Then, you might put another 10% or 15% or more into a “large expenses account”, to be used for paying larger bills like insurance. Then, you might set money aside in other accounts for day to day living expenses, or luxuries.

You can manage your money this way by using different bank accounts, or even by using a spreadsheet to keep track of all the money in your own bank account. However these days, online banking is becoming more sophisticated and many banks allow you to setup these smaller accounts within a single account. For those who would like to explore these concepts in more detail, I can highly recommend the book The Barefoot Investor by Scott Pape.

In summary, the Habit of Saving will speed you on the road to success by helping you develop discipline, a security buffer and better trading psychology.

Action Item: Decide how much of every dollar that comes your way is “yours to keep”. Then, decide where you are going to store it, and what you are going to do with it. Then, for the next six months, build the Habit of Saving. You might be surprised at the positive difference this one little habit will make to your trading, and to your life!